Hello my fellow traders,
Ok, so this week I wanted to stay in the GLD, but it wasn’t meant to be so we went to another old friend (and sometimes enemy) Apple (AAPL). I will detail the whys in the analysis section.
Many exciting things went on last week. My cutting from “The Doll House” went up and down in one class. I think we did well on the scene. My friend who was the director was much relieved that it was over and that we brought forth most of what she wanted. We were ready and prepared and went up on schedule, which the folks scheduled to go behind us didn’t. The professor in the class is a stickler for details so that lack of start time didn’t bode well for them.
It was π day at Mathnasium! This is a great nerd holiday (and I proudly claim the title of nerd)! There were lots of activities around the concept of π and of course a pie in the face for the instructors on a regular basis throughout the time. The owner got some t-shirts that she was going to give the instructors until she realized that they were all YOUTH sizes and not ADULT sizes. They had the following on them:
And it was delicious!!!
For those of you not familiar with the symbols it reads:
i 8 sum pi
I loved it. I have the website and will definitely be getting one of those!
Lastly conferences for the kids were Thursday and Friday with our kids’ on Friday. Kids are doing very well in their classes. Boy is bringing up his GPA during the course of the year and this this past quarter he hit an all-time high for his high school career.
ANALYSIS
Here is the trade I wanted to get into:
GLD 150.00 Call $ 0.1200
GLD 149.00 Call $(0.0600) This should have given a $0.0600 Gross Credit for a 6.00% ROI
I wanted this trade bad. I had all the set up work done and it looked great:
1. The Bollinger Band filter gave its ok – multiple break outs as shown by the arrows on the graph
2. The probability was 95.67%
3. The trend was moving slightly higher for the week
4. The stocks/ETF list was really light on premium this week so it was a welcome sight to see this set up.
5. IV > HV looked good
6. ROI was a go
Now I entered the trade at the bid price and waited for all my hard work to pay off! And I waited….and I waited….and I waited. I never got filled in on this trade. It very much surprised me since I went in right at the bid price. When I thought of it afterward I should have gone down a penny in price to a $0.05 and I probably would have been filled and would have still been on target for the ROI. But I didn’t and so I had to look for another trade.
Here is the trade we did this past week:
AAPL 445.00 Call $ 0.3100
AAPL 450.00 Call $(0.1800) This gave a $0.1300 Net Credit for a 2.60% ROI
As I said above the premiums were really light. When I went Thursday morning to find a trade to put on there was not trade that met all the criteria. The big stumbling blocks were the Bollinger Band, probability and ROI filters. The only trade I could find that met all the criteria except for the ROI filter was the AAPL trade above. And as it turned out we needed every bit of the cushion that the system builds in to make this trade profitable.
1. I went through the list of stocks and ETFs I trade in looking for a better trade than the GLD but couldn’t find one. Here are the ones I looked at:
a. Stocks – AAPL, GMCR, GOOG, PCLN, NFLX
b. ETFs – GLD, SPX, SPY, QQQ, SLV
2. I was looking for the following conditions to be met:
a. IV (Implied Volatility) > HV (Historical Volatility) on a minimum 3 month chart
b. A market price that breaks out of the Bollinger Band Range set as 20 Day Moving Average and 2 Standard Deviations.
c. Probability of success measured on my two trading platforms of Trademonster and Optionshouse of at least 90%
d. A definite trend shown in the monthly and weekly charts
e. At least 3.5% Net ROI on the trade
3. Only AAPL met these criteria with the exception of the ROI criteria which came in just higher than 2.5%:
a. The IV > HV
b. There were Bollinger Band Breakouts on the Weekly Chart. This is shown by the green arrows on the graph. These were the good ones. On Monday and more importantly the blue one on Friday gave us a counter indication to the trade we put on
c. Success probability was at 95.92% for Trademonster and 96.77% for Optionshouse
4. This trade looked good as all our indicators outside the ROI pointed toward a successful trade. Plus Samsung was unveiling a new Galaxy Smartphone Thursday evening after the close of the market and the word was on the street that it was going to be amazing. And it was, but all the new stuff was already out – so the impact on the AAPL stock was negligible. In fact AAPL shot up over 2% and came within a $0.80 of my lower strike.
5. This is where my real problem with my lack of execution on the GLD trade came into play. I had to babysit the AAPL trade most of the afternoon as it would go down then bump back up then go down, then right at the close started to bump up again, and shortly after the close rose above my lower strike. Since that rise happened in the aftermarket hours I was safe, but up till that closing bell I was sweating a bit. IF I had been put into my GLD trade then basically from Thursday morning on I would have been able to relax and not worry about my trade going south.
6. Lesson – Sometimes a little less profit is worth the peace of mind it buys.
PAPER TRADE
Paper trade this week is called a modified strangle. In a regular strangle trade you buy a put and a call at the same strike price and expiration date. I like to try these when I see the setup is looking good for one of these types of trades, but so far I have only paper traded them. They are similar to the spread trades that I do in that you know one of the sides will lose money, but unlike our spread trades, if the underlying stock doesn’t move, then there is the possibility of both sides losing money.
I did what I call a modified strangle because I bought a call and a put but at different strike prices on the same expiration date. I put this strangle on in the same AAPL expiration for this past Friday. Thursday night and Friday morning aftermarket trading in AAPL sent the stock up over 1% and the momentum looked good for the rest of the day. Basically one side should make money, and the other side is insurance in case there is a price reversal. So here is the trade:
Buy AAPL 440.00 Put $0.28
Buy AAPL 445.00 Call $0.32
Trade Cost $0.60
Now as the price rose throughout morning and into the early afternoon hitting a high of around $444.20. Here is how I go out of the trade:
Let the Put expire worthless losing $28
Sold the Call at $0.82 for a profit of 82-32=$50
Total profit = $50-$28 = $22 per pair
Yahoo ongoing trade:
Yahoo Sell July22 Call $ 57 Buy Back $149
Yahoo Buy July20 Call -118 Sell Off $275
Yahoo Sell July17 Put 66 Buy Back $ 20
$ 5 $106
Net Profit = $101
This trade continues to be profitable, but we lost $6 this week with the slight decline in YHOO this week. We still have months for this trade to run, and I am looking for a price of $25 in YHOO. If I do hit the price target I will get out of this trade and with a profit. The overall bullish bias for this trade is still in place and until that changes I will keep this one on the books.
COVERED CALLS
We still have our covered calls on Vivus and CBI again.
Symbol Company Stock Option Premium Initial Annualized
VVUS Vivus 11.70 Mar16 .28 2,676.00 12.56%
CBI Chicago Bridge 57.02 Mar55 1.25 5,409.00 27.73%
These are the completed covered call trades this year:
Symbol Month Premium Month ROI Ann Month ROI Cum Prem Cum An ROI
VVUS January $32 1.19% 14.35% $32 14.35%
VVUS February $63 2.35% 25.25% $95 21.30%
VVUS March $28 1.05% 12.56% $123 13.79%
CBI January $50 1.12% 13.39%
CBI March $ 125 2.31% 27.73% $175 12.94%
VVUS – This stock is still in the $10-$12 doldrums. I am planning on selling my VVUS shares and then repurchasing again after the wash sale rule time has expired. This will let me take a tax loss to offset some of the gains I have made then reenter this stock at a lower price and give us some room for appreciation as well as option premium.
CBI – As I thought we were called away with the stock. So we made option premium AND stock appreciation. This is the best of both worlds. I don’t mind inching up in cost basis since I keep making good profits on both ends of the transaction. We made 3.88% total return on stock and option premium for the month we held CBI. I will take this any month of the year.
Some people would say that we have had a great year already for the portfolio. True if we go on return based on premium, but if we go with the traditional measure of call premium PLUS liquidation value of underlying stock then we are hurting. But I like to look at cash flow and we are doing well with this. This is the cumulative covered call results for 2013:
Symbol Invested $ Option Prem Call Away Total Return
VVUS $2,676.00 $ 123 $123 4.60%
CBI $4,480.00 $ 50 $320 $370 8.26%
CBI $5,409.00 $125 $ 91 $216 3.88%
Totals $12.925.00 $300 $411 $711 5.50%
DIVIDEND STOCKS
Here are the two portfolios updated.
This portfolio is made up of 100 shares of each stock:
Ticker Name Buy Current Date Div
Price Price Yield
KO Coke 38.17 38.83 08/27/2012 2.71%
AGD Alpine Global Dynamic 5.76 4.78 08/27/2012 6.25%
AOD Alpine Total Dynamic 4.37 4.11 08/27/2012 7.41%
MO Altria 34.26 33.68 08/27/2012 5.17%
INTC Intel 22.87 21.38 10/01/2012 3.94%
HIX Western Asset Hi Inc II 10.53 9.79 10/15/2012 9.44%
MCD McDonald’s 91.74 99.67 10/30/2012 3.55%
MSFT Microsoft 28.55 28.04 10/30/2012 3.12%
JNJ Johnson and Johnson 68.03 79.19 11/23/2012 3.53%
PG Proctor and Gamble 68.72 76.34 12/21/2012 3.27%
Buy Price Portfolio Value = $37,300.00
Current Price Portfolio Value = $39,581.00
Gain/(Loss) So Far = $2,281.00
Portfolio Return = 6.12%
Dividends Received So Far = $368.72
Portfolio Return w/ Dividends = 7.10%
Current Prices as of 03/15/2013 Closing Price
We keep our slow and steady climb with this portfolio. We have a total return of just over 7%. This is fairly good for a dividend portfolio for a year, so I am happy. I will be even happier as the year progresses and we grab even more return. We are guaranteed return due to the dividends. And if the projections for the stock market are accurate we could have a banner year!
I will be taking AGD and AOD out of the portfolio by the end of the month. I have some ideas for replacements and will announce them when I add them to the portfolio.
Both portfolios will carry a 15% stop on them. Portfolio #1 has 100 shares of each stock and will generate $1,198 in dividend revenue assuming no reinvestment. This gives a 4.01% return. Portfolio #2 will have $5,000 invested into each stock and there will be dividend reinvestment. I will carry shares out 3 decimal places. So here is how Portfolio #2 shakes out:
Ticker Name Buy Current Ex-Div.
Price Price Date Shares
KO Coke 36.89 39.22 06/13/2013 135.917
AGD Alpine Global Dynamic 5.76 4.79 04/19/2013 970
AOD Alpine Total Dynamic 4.37 4.07 04/19/2013 1,248.370
MO Altria 34.26 34.00 06/22/2013 148.894
INTC Intel 22.87 21.58 05/03/2013 240
HIX Western Asset Hi Inc II 10.53 10.11 06/13/2013 523.091
MCD McDonald’s 91.74 98.71 05/28/2013 55.425
MSFT Microsoft 28.55 28.00 05/19/2013 183.492
JNJ Johnson and Johnson 68.03 78.19 05/25/2013 71.547
PG Proctor and Gamble 68.72 77.18 04/19/2013 72.529
Buy Price Portfolio Value = $51,996.01
Current Price Portfolio Value = $52,184.05
Dividends Received So Far = $391.08
Dividend ROI = 0.75%
Stock Return = 0.36%
Total Return = 1.11%
The difference in the portfolios is the timing in the buying of the securities.
Like above I will be replacing AOD and AGD by the end of the month.
Here is the watch list. Our three keys make getting on the list and then getting into the portfolio rather difficult. Here are the three keys: (1) a moat business model, (2) dividend of at least 3%, (3) solid fundamental analysis numbers.
Ticker Recent Date Div Target
Name Price Yield Price
WFC Wells Fargo 38.20 2.85% 35.00
COP ConocoPhillips 59.07 4.53% 58.00
BAC Bank of America 12.57 0.35% 11.00
BRKB Berkshire Hath B 102.79 No Div Pd 100.00
STI SunTrust Bank 29.06 0.69% 29.00
The first thing that should jump out at you is that these stocks really don’t fit the dividend portfolio model except for COP. These stocks were picked more on the basis of anticipated growth.
Wells Fargo – This stock is starting to reap the benefits of getting itself out of a lot of the mortgage mess it found itself in for the past few years. The dividend is likely to increase as the Feds loosen up on the banks
ConocoPhillips – This stock has great potential as the move significantly higher as the recent earnings was good and it has beat the street consistently.
Bank of America –This stock is keeping up a pattern of growing revenues and earnings after nearly collapsing in the banking crisis. This is a stock that I wish I had gotten into at this time last year at around $4.00
Berkshire Hathaway B Class – This is the way more affordable way to get into Berkshire Hathaway and Warren Buffett than the $150K+ regular Class A shares. Over any period of time 2years or greater an investment in Berkshire has made money. This past year (2012) the S&P beat Berkshire, only the 5th time that has happened in the history of Berkshire – over 40 years. So this is one that is purely price appreciation. DISCLOSURE – I own this in my personal stock portfolio –one of the few stocks I do own.
STI – SunTrust Bank – This is a regional bank that didn’t pass the stress test the first time around but did in the results announced Thursday. Regional banks seem to be where the action will probably be in the financial sector. It has a paltry dividend ROI right now, but now that the stress test is passed the bank will be able to modify this and will probably open up the dividend some more.
QUESTIONS
Today is not really a question, but a list of trading rules from Jim Cramer of CNBC’s Mad Money and Squawk On The Street fame. This can be found on the free portion of www.thestreet.com the site that Cramer started. I am not endorsing Mr. Cramer’s site and I am not paid by them. I do like his smarts and his trading commandments are good to know whether you are a stock or options or whatever trader you are. Here are the first 5 of his 25 trading commandments:
It's essential for all traders to know when to take some off the table.
Rule 1
First, I think you would tell me that I was nuts, and not worth listening to. But what if I were so persuasive that you believed me. Wouldn't you want every penny you had in the Nasdaq right now?
Or would you say, "Nope, not for me, this one's not worth catching. I don't want the 1,000 points, I don't want the double and I certainly don't want that last 1,000 points. Way too dangerous for me."
From the way people talk these days, with sober intonations about the market, total sobriety, you would believe the latter. You would think that people would avoid that 3,000-point move like the plague. Because we know how that 3,000-point up move turned out, we know that we simply climbed the stairs to jump off the tower.
Yet, that's what happened six years ago, that exact same sequence. Knowing what we know now about how hard it is to make money in the market, I think we would regard ourselves as utter fools if we avoided that incredible move simply because we didn't have to jump off the tower of Nasdaq 5000. It wasn't inevitable.
It wasn't inevitable unless we are pigs.
Which leads to one of my absolute favorite adages:
Bulls make money, bears make money, pigs get slaughtered.
Rules like that one — simple, nonquant and yes, nonfinancial rules — saved me in 2000.
These days there's plenty of revisionist history on the part of financial commentators, editors and occasionally even brokerage house personnel — if they let themselves wax philosophical — about what happened when the Nasdaq bubble burst. Those who tried to capitalize on it are now ridiculed. Those who avoided it are now held up as some sort of paragon worthy of Diogenes.
Hardly.
The truth is that for one year of our lives, the Nasdaq gave away money to those who were bulls, but after 3,000 points, the bulls morphed into pigs and everyone who was piggish got annihilated.
So often, when I bring this adage up, people ask me "How do you know when you are being a pig?" I know there's not supposed to be any stupid questions out there, but the answer is, frankly, you don't need me to tell you. If you weren't feeling piggish after we hit an all-time high on the Nasdaq in 2000, you needed a shrink, pronto.
Remember, my goal is to stay in the game. The people who got wiped out by the Nasdaq crash tended to be people who never took anything off the table, who never felt greedy, who got slaughtered by their own piggishness.
Unlike so many others I see and hear on television or read in articles, I have no regrets about liking the market during that period. To have avoided those 3,000 points would have been sinful. It would have been suicidal for a professional manager.
But it was my desire not to be a pig that kept me in the game in March and April of that year. That's why I remind people every day: Have you taken your profit? Have you booked anything? Or are you being a pig? Because you never know when things you own are going to crash. You never know when the market could be wiped out. You can't have certainty. At those times, you have only human nature to guide you.
Whenever I struggle with a stock in my Action Alerts PLUS portfolio because I have booked so many profits that I feel I don't have enough on my sheets, I console myself with the simple lesson of Nasdaq 5000. For example, I caught the oil move in a prudent way that made me a lot when it first started but couldn't make me as much later, simply because I had taken stock off because I didn't want to be a pig. That meant I would make less money than others who were in the patch. I accepted that, as I do every time I make the decision not to be a pig.
It's the price I have to pay for following my adage. It always seems a high price when things are going well, as it did in March 2000 when I sold so much stock.
Until I look back and realize that my desire not to be too greedy saved me so I could live to play again
Stop fearing the tax man and start fearing the loss man because gains can be fleeting.
Rule 2
It's OK to pay the taxes.
When I went bearish in March 2000, I received a huge amount of angry email from people who felt aggrieved. They had bought, I don't know, Redback Networks (RBAK - news) or InfoSpace (INSP - news) because of me, because of something I wrote, and now they were being told to sell it.
Had I no regard for them? Had I no regard for how much in taxes they would have to pay because the gains were short-term? What was the point of making money in a compressed period of time when it meant you would have much less to show for it than if the stock were held long-term?
I had zero sympathy for these people. I had long ago made my peace with the tax man. I knew that some gains were and are simply unsustainable. Given, though, that so many people thought that if you bought and held, you always ended up with more than if you bought and sold, my discussion fell on deaf ears, an audience like the character in The Lord of the Rings, Gollum, who says, "I'm not listening, I'm not listening."
Anyone who held on to get the long-term gain then ended up with no gain at all. You obviated the need to pay taxes the hard way; no taxes are due when you sell at a loss.
It's important to remember that gains, any gains, can be ephemeral. It is better to stop worrying about the tax man and take the gains when those gains appear unsustainable than to ride things back to a loss. Stop fearing the tax man; start fearing the loss man. You won't regret it.
To maximize your profits, stage your buys, work your orders and try to get the best price over time.
Rule 3
And from where I sit, that's all wrong. 100% wrong. Never buy all at once. Never sell all at once. Stage your buys. Work your orders. Try to get the best price over time.
When I first started out as a professional trader, I wanted to prove to everyone how big I was and how right I would be. If I wanted to buy Caterpillar (CAT - news), by golly, I wanted to buy it now, big, at one price, because I was so sure of how right I was. "Put me up on 50,000 CAT!" I would scream, as if I were the smartest guy in the universe.
What an arrogant son of a gun I was. Arrogant and wrong.
What should I have been doing? Following my rule that you don't buy all at once. If I wanted to get 50,000 CAT in, I would buy it in units of 5,000 over time, trying to get the best price. I would put some on to start and then hope to work my way down to get a better basis.
I no longer trade institutionally. I no longer trade "in size." But I still invest for my Action Alerts PLUS portfolio, and when I have a new name, I buy in 500-share increments over a day to get my several thousand share position on. I did it in a way that gave me a terrific price.
Why don't more people do it my way? Why don't people, if they want 500 shares of ExxonMobil (XOM - news), buy it in 100-share increments? I think it is because they want to be big, too. They don't want to waste their broker's time. The broker wants to get the trade done. I know my brokers hated it when my wife, who came in to run my trading desk, took orders like mine for CAT and then broke it into small increments and worked in over a day's time.
You must resist feeling like you are making a statement. I have bought and sold billions of shares of stock. Do you know how often I got it in at the right price? Do you know how often the last price I paid was the lowest and it was off to the races? Probably one in one hundred. And I'm pretty good at this game.
Resist the arrogance, buy slowly, even buy over a couple of days as I do for my Action Alerts PLUS portfolio. It's humbling and it's right.
There are no refunds on Wall Street, so do your research and focus your trades on damaged stocks rather than companies.
Rule 4
You can't return merchandise on Wall Street and get your money back. Nope, no way.
Which is why I always say:
You have to buy damaged stocks, not damaged companies.
Sometimes these buys are easy to discern. In 1998, when Cendant (CD - news) was defrauded by the management of CUC International through a series of bogus financials, the stock went from $36 to $12 in pretty much a straight line. Was that a one-day sale that should be bought? No, that was a damaged company. It took years for Cendant to work its way back into the hearts of investors. Some say it has never recovered.
But when Eastman Chemical (EMN - news) announced a shortfall in early 2005 because of a problem — a fixable problem — at one of its facilities, that 4-point dip was a classic panic sale, one that you had to buy. The stock subsequently moved up a quick 8 points when the division recovered in the next quarter.
Sometimes, the sales on Wall Street aren't as obvious. I got snookered in 2004 thinking that Nortel's (NT - news) accounting problems were a simple sale of a damaged stock, with the company quite whole. In fact, the company was gravely damaged by an accounting fraud, and it has looked doubtful the company would ever recover.
And sometimes the sale is so steep that it looks as if something's dreadfully wrong, when really the problem is something that over the longer term will go away.
How do we know if there is something wrong with the company instead of just the stock? I think that's too complicated a question. What I like to do is develop a list of stocks I like very much, and when Wall Street holds an en masse sale, I like to step up to the plate. I particularly like to be ready when we have multiple selloffs in the stock market because of events unrelated to the stocks I want to buy, a major shortfall of an important bellwether stock, or perhaps some macro event that doesn't affect my micro-driven story.
Of course, sometimes you just have to deduce that the company's fortunes haven't really changed, and the fundamentals that triggered the selloff (either in the market or in the company) will be something that will reverse themselves shortly. But you never know. Which is, again, why I think that rule no. 3 must be obeyed. If you don't buy all the stock at once, and if you take your time, it is more likely that you won't be left holding a huge chunk of merchandise when more bad news comes around the corner.
If you control the downside and diversify your holdings, the upside will take care of itself.
Rule 5
The biggest risk out there is sector risk. I don't care how great a tech stock was in 2000 — even eBay (EBAY - news) and Yahoo! (YHOO - news) — if you had all your eggs in that sector, you got scrambled. Same with pharma in the last several years. Or oil in 1982, when I broke into the business.
What can keep you from getting nailed by sector risk, which is about 50% of the entire risk of owning a stock?
Diversification.
It's the only investment concept that truly works for everyone. If you can mix up enough different sectors in your portfolio, you can't be hit by one of the myriad perfect storms that come our way far more often than you would think.
Why aren't more people diversified? Many amateurs don't know the stocks they buy. They end up with stocks that are frighteningly similar. When I started playing "Am I Diversified" on my radio show in 2001, I was blown away by how few people knew just how undiversified they really were.
I still field quite a few calls from people who genuinely think that owning Sun Microsystems (SUNW - news), EMC (EMC - news) and Microsoft (MSFT - news) is a form of diversification because they own servers and software!
They think that having Pfizer (PFE - news), Bristol-Myers Squibb (BMY - news) and Procter & Gamble (PG - news) makes them safe!
And no matter how much I may like oil stocks at any given moment, I can't countenance a portfolio made up of ExxonMobil (XOM - news), Chesapeake Energy (CHK - news) and Halliburton (HAL - news).
An undiversified portfolio is not just an amateur mistake, though. Many professionals don't like to be diversified because of the bizarre way money is run in this country. If you concentrate all your bets in one sector and the sector takes off, you will beat pretty much every diversified fund out there. That's the nature of the beast. You then can market yourself as a huge success and get profiled by every magazine and take in capital from unsuspecting folk who don't know how much risk you truly are taking on.
Both amateur and professional are wrong; controlling risk is the key to long-term rewards and controlling risk means being diversified at all times.
All charts from freestockcharts.com. This is not a paid endorsement. They are a good free app that only asks for credit on their charts when you use them.
DISCLAIMER: Hashley Capital Management, LLC; as well as I are not giving any trading advice. All data is historical in nature and is intended for use as an educational tool. Trading in stocks and/or options is risky and can result in loss of capital. Stocks and options carry inherent risks and should be well researched before any buy/sell decision is made. There is no attempt to sell any brokerage services or act as a broker or dealer by Hashley Capital Management, LLC. Any forward looking comments on this blog are not attempts to solicit business for Hashley Capital Management, LLC and are the opinion of Hashley Capital Management only. If you choose to follow the same path and invest in the strategies and trades used by Hashley Capital Management, LLC after doing your own due diligence, that is your decision and yours alone.
Reach me @:
Twitter: @awagel01
Stocktwits: awagel01
Or leave a comment on the blog
TTFN
Ash
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